Consumption Bundle Assumptions

Introductory Macroeconomics

Following up from our introduction to economics/macroeconomics article, this post talks about ‘self-interest’ and maximizing over a set of preferences subject to constraints.

Let’s start off with some examples, but first, the tools we’ll need (some images used because it’s a bit tough to get the right characters).

Consumption Bundle (CB):
consumption bundle

Preference Ordering: Will use statements to rank bundles from least to most. It is possible to construct if: 1. You are always able to make such a statement, 2. Statements are consistent.

Let’s explore some of these ordering assumptions.

A1 – “Completeness” Assumption: Given any two CB’s, one of them is true.
consumption bundle

A2 – “Consistency or Transivity” Assumption: Given any 3 CBs:
consumption bundle

A1 and A2 are CORE assumptions about preferences or rational decision markers.

Taken together they guarantee an individual can consistently rank any set of CB. (They have complete preference ordering.)

A3 – “Non-satiation” Assumption: If some is good, more is better.

A4 – “Maximization” Assumption: Individuals always make choices that maximize their preference ordering.

The implications of A3 and A4 are:

1. Scarcity, you always want more than what’s available.
2. People always fully exploit opportunities (all gains from trade are exhausted in equilibrium).
3. Imposes argument to explain behaviour.

In part two, a bit on trade offs and more assumptions.

[tags]consumption bundle, consumer, assumptions[/tags]

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